Catastrophe bond investor returns more than double: Aon Benfield

There are some telling numbers in the latest quarterly insurance-linked securities and catastrophe bond market report from reinsurance broker Aon Benfield. Showing just how different secondary cat bond market prices have been this year, Aon Benfield provide return figures for 2013 versus 2012 and it’s clear that cat bond investors have enjoyed a much better first quarter in 2013 than they did a year earlier.
We’ve been discussing the unseasonal movement in cat bond spreads and the strength in secondary market cat bond pricing for some weeks here on Artemis and it’s timely to see the data that Aon Benfield includes in this report. The first stunning fact; for an annual period running up to the 31st March 2013 the total-return of the Aon Benfield All Bond index was 12.69%. Compare that to the same period a year earlier, when the same index which roughly tracks the total return of the entire cat bond universe only returned 5.90% and its clear that investors have been enjoying very attractive returns.

If you take the first quarter of 2013 in isolation, the All Bond index rose by 3.13% compared to only managing 0.54% in the first quarter of 2012. That clearly shows how different the secondary cat bond market has been at the start of this year compared to last. In 2013 outstanding cat bond prices have seen strong gains, with unseasonal price movements and a difficult trading environment put down to lower than expected primary cat bond issuance and abundant capital seeking to gain access to cat bond and ILS risk.

Aon Benfield’s other cat bond indices, which demonstrate the possible investment return from different segments of the outstanding cat bond market, show a similar impressive story for Q1 2013. The BB-rated Bond index rose by 2.25% in Q1 2013, compared to 0.53% a year earlier, the U.S. Hurricane Bond index rising by 2.29%, compared to 0.28% in 2012, and the U.S. Earthquake Bond index increasing by 2.38%, compared to a low 0.14% in Q1 2012.

So for the year ended 31st March 2013 the cat bond market, as represented by Aon Benfield’s All Bond index, returned 115% more than it did a year earlier. That’s an outstanding performance in the current global economic climate. If we look at just Q1, then the 3.13% it returned in Q1 2013 is 480% up on the mere 0.54% it managed in Q1 2012.

While these numbers are stunning they do need to be taken in context of the conditions that we have been witnessing in the secondary cat bond market caused by continuing inflows of capital and different primary issuance patterns to a year earlier. The first quarter of 2013 has seen secondary prices react in a very different way to a year before and this is a clear sign of a market receiving increasing interest and undergoing strong growth right now.

Aon Benfield’s quarterly ILS and cat bond market report details all the issuance that occurred during Q1. They recorded $670m of new issuance in the quarter from three deals, with an additional $1.12 billion being marketed in the quarter but not completing. Aon Benfield’s numbers are slightly lower than those included in our Deal Directory as we include private transactions which we have the details of. We recorded $731.2m of completed issuance and the same $1.12 billion being marketed in the quarter bringing the total marketed in Q1 according to our Deal Directory to approximately $1.851 billion.

Issuance of new cat bonds in Q1 was less than half that issued a year earlier, $1.493 billion was issued in Q1 2012, and this combined with an increasingly strong investor demand for the asset class has contributed to the unusual and unseasonal price movements in secondary cat bonds and the high returns investors have experienced.

This strong demand for the catastrophe bond, insurance-linked securities, catastrophe risk and reinsurance asset class from institutional and capital markets investors is expected to help the sector continue to grow. The abundance of capital and investor interest has helped spreads on new cat bonds to drop to record low levels which Aon Benfield see as positive for the sector and hope will encourage more new sponsors to come to market in 2013.

Aon Benfield expect strong catastrophe bond issuance volumes will continue and forecast as much as $4 billion of issuance will come to market by the end of June. As long as there are no major catastrophe events Aon Benfield expect the year 2013 will result in another positive year for investor returns in the cat bond and ILS market too.

Given the strong investor and sponsor demand for ILS and cat bond solutions, Aon Benfield says that it expects 2013 to be an active year for both primary deal issuance and secondary market trading activity.

Paul Schultz, Chief Executive Officer of Aon Benfield Securities, commented; ”Capital flows into the ILS sector materially changed the tone of the market in the first quarter of 2013. Risk adjusted pricing decreases benefited clients and visibility of the catastrophe bond market has never been higher. Momentum gained in the first quarter of 2013 has most certainly carried forward into the second quarter of 2013, both in terms of capacity and price.”